Concerns over reiterated forecasts in Apple's 10-K filing 'overdone'

Reaction to the gross margins forecast in Apple's annual 10-K filing this week has been unnecessary, as the numbers are no different than those presented earlier this month during the company's quarterly earnings call, Wall Street analysts have noted.

Shaw Wu with Kaufman Bros. said in a note to investors Thursday that some have incorrectly interpreted the information from Apple's 10-K filing as new guidance. He noted that the information is consistent with what the company said in its most recent earnings call, and in almost every annual 10-K filing about the upcoming fiscal year.

"Keep in mind, SEC filings are written by lawyers and tend to be conservative and cautious, as this is the most prudent thing to do from a legal standpoint," Wu wrote. He has recommended that investors take advantage of a potential share weakness.

Wu also noted that investors who may have become fixated on Apple's cautious gross margin projections would have passed on a "significant investment opportunity" the last 5 to 7 years.

He also said that trends could work to the company's benefit in the future, as the economies of scale on newer products like the iPhone 4, iPad and MacBook Air improve. He said checks with supply chains indicate that Apple is looking to have another display and touchscreen supplier in the first half of 2011, which would lead to lower costs per unit.

Mike Abramsky of RBC Capital Markets also issued a note to investors on Thursday downplaying the significance of the 10-K filing. Both he and Wu characterized the concerns over gross margins as "overdone."

"In the 10-K, Apple reiterated (not revised) its prior [first quarter] guidance for 36% gross margins," Abramsky wrote. "The disclosure is not unusual -- Apple has reiterated its gross margin in its 10-K for several years."

Abramsky also sees iPhone 4 gross margins improving with scale. In addition, he too sees the situation as a buying opportunity for investors.

Apple on Wednesday issued its annual 10-K filing, in which it reiterated earlier statements that new products like the iPad and MacBook Air have been priced aggressively. As a result, the Cupertino, Calif., company has said that those products will likely drive down its gross margins in fiscal year 2011.

However, some media outlets portrayed the information, previously stated in Apple's quarterly earnings call on Oct. 18, as new information. As a result, shares of AAPL were off by about 1 percent Thursday in pre-market trading.

If you want to reach everyone and expand even larger then you will have to bring prices down and close your profit margin, not sure why this is a surprise? Sure you can have the attitude that you would rather sell less and keep prices high but your market will not be that large.

Well, in this particular case, the analysts are correct on at least 3 counts...

(1) media outlets ARE presenting this information as new
(2) the information IS, in fact, the same as what was presented on the conference call, and
(3) the stock has been punished for it

When information that is already known, and therefore already "baked in" to the stock, is used to cause the stock to move, it is just a case of someone exploiting the ignorance of weaker (and less informed) hands. This is a temporary setback and the price should recover. That makes it a buying opportunity.

Of course, there are other factors that will influence the stock price over the coming days, weeks, months, etc, and nobody can say with any certainty where the stock will go in the near term. It's just a matter of knowing that, all things being equal, the stock has been sent temporarily lower for no good reason.

There will be a drop in margin... hopefully not all the way down to 36%, but I doubt we will see 40% again in the next year. If they have 30-40% growth in total revenue though, there is still plenty of growth in net profit. Ultimately though, it is harder to keep revenue growing at an exponential pace than earnings (through improved margins). This is a reasonable scare for investors.

...but at a PE of 20-21, it is already well factored into the price. It isn't something like Amazon or Netflix where you have a huge PE to contend with and comparable growth in top line.

Remember the conference call when Tim Cook noted that the actual 4Q gross margin decline was only half the guidance they gave in July? Apple's track record for guidance is consistently conservative. We need to keep that top of mind when sifting through all the daily news rubbish.

I admit to being a Fanatical Moderate. I Disdain the Inane. Vyizderzominymororzizazizdenderizorziz?

Well, in this particular case, the analysts are correct on at least 3 counts...

(1) media outlets ARE presenting this information as new
(2) the information IS, in fact, the same as what was presented on the conference call, and
(3) the stock has been punished for it

When information that is already known, and therefore already "baked in" to the stock, is used to cause the stock to move, it is just a case of someone exploiting the ignorance of weaker (and less informed) hands....

Thompson

Agreed. It's events like this that make $20 moves upward over two or three days easy for aapl. And I'd imagine there are a large number of casual investors in aapl that are easily spooked by # 1 above.

Well, in this particular case, the analysts are correct on at least 3 counts...

(1) media outlets ARE presenting this information as new
(2) the information IS, in fact, the same as what was presented on the conference call, and
(3) the stock has been punished for it

When information that is already known, and therefore already "baked in" to the stock, is used to cause the stock to move, it is just a case of someone exploiting the ignorance of weaker (and less informed) hands. This is a temporary setback and the price should recover. That makes it a buying opportunity.

Of course, there are other factors that will influence the stock price over the coming days, weeks, months, etc, and nobody can say with any certainty where the stock will go in the near term. It's just a matter of knowing that, all things being equal, the stock has been sent temporarily lower for no good reason.

Thompson

Stocks often move, both up and down, for no good reason. They even move sideways for no good reason. The biggest mistake investors commonly make is looking for pricing rationality, and to expect a cause explanation for every effect. Market behavior is fundamentally not rational. Traders react not only to what they know, but what they think they know, what they can guess, and what they believe other people think and expect or have guessed. The stock is not being "punished" for anything but being traded publicly.

Stocks often move, both up and down, for no good reason. They even move sideways for no good reason. The biggest mistake investors commonly make is looking for pricing rationality, and to expect a cause explanation for every effect. Market behavior is fundamentally not rational. Traders react not only to what they know, but what they think they know, what they can guess, and what they believe other people think and expect or have guessed. The stock is not being "punished" for anything but being traded publicly.

That is too simplistic, and perhaps too cynical. I agree that the noise-to-signal is high, but there are many many instances, often consistently across firms, when there are credible, market-adjusted, measurable stock price movements that are rationally attributable to specific announcements or events.

Tim Cook is gay, believes in climate change, and cares deeply about racial equality. Deal with it (and please spare us if you can't).

Reaction to the gross margins forecast in Apple's annual 10-K filing this week has been unnecessary, as the numbers are no different than those presented earlier this month during the company's quarterly earnings call, Wall Street analysts have noted.

Shaw Wu with Kaufman Bros. said in a note to investors Thursday that some have incorrectly interpreted the information from Apple's 10-K filing as new guidance. He noted that the information is consistent with what the company said in its most recent earnings call, and in almost every annual 10-K filing about the upcoming fiscal year.

"Keep in mind, SEC filings are written by lawyers and tend to be conservative and cautious, as this is the most prudent thing to do from a legal standpoint," Wu wrote. He has recommended that investors take advantage of a potential share weakness.

Wu also noted that investors who may have become fixated on Apple's cautious gross margin projections would have passed on a "significant investment opportunity" the last 5 to 7 years.

He also said that trends could work to the company's benefit in the future, as the economies of scale on newer products like the iPhone 4, iPad and MacBook Air improve. He said checks with supply chains indicate that Apple is looking to have another display and touchscreen supplier in the first half of 2010, which would lead to lower costs per unit.

Mike Abramsky of RBC Capital Markets also issued a note to investors on Thursday downplaying the significance of the 10-K filing. Both he and Wu characterized the concerns over gross margins as "overdone."

"In the 10-K, Apple reiterated (not revised) its prior [first quarter] guidance for 36% gross margins," Abramsky wrote. "The disclosure is not unusual -- Apple has reiterated its gross margin in its 10-K for several years."

Abramsky also sees iPhone 4 gross margins improving with scale. In addition, he too sees the situation as a buying opportunity for investors.

Apple on Wednesday issued its annual 10-K filing, in which it reiterated earlier statements that new products like the iPad and MacBook Air have been priced aggressively. As a result, the Cupertino, Calif., company has said that those products will likely drive down its gross margins in fiscal year 2011.

However, some media outlets portrayed the information, previously stated in Apple's quarterly earnings call on Oct. 18, as new information. As a result, shares of AAPL were off by about 1 percent Thursday in pre-market trading.

Apple's inventory increased ca $600,000,000 year to year. I suspect that they were building inventory, largely iPad, for the sales blitz now under way. This would be reflected in their cost of sales for the quarter, but not in the revenue. The inventory would probably be at cost of manufacture, which is about $300 for both the iPhone and the iPad, a=nd represent ca 2,000,000 units. This would drop the gross margin by about 3 percentage points, to be recovered when they are sold in the current quarter.

That is too simplistic, and perhaps too cynical. I agree that the noise-to-signal is high, but there are many many instances, often consistently across firms, when there are credible, market-adjusted, measurable stock price movements that are rationally attributable to specific announcements or events.

I did say "often," not "all."

I don't see where you get the cynicism. It's certainly a far less cynical explanation than "it's all a manipulation," which we hear ten times a day on these boards whenever AAPL goes down for no apparent reason. It's also not simplistic; in fact, it's a short explanation of the complex human behavior of public trading. Traders are not only reacting to what they know, believe and think, but to what they believe others to know and think. In this particular case, even a trader who knows that the 10-K release contains nothing the markets didn't know a week ago, they might be tempted to trade on the expectations that other traders might not know. It's a kind of mass behavior that can't explained by rationality alone, if at all.

Note the distinction I make between trading and investing. Only traders care about this kind of short-term trading psychology. Investors don't pay any attention.

Stocks often move, both up and down, for no good reason. They even move sideways for no good reason. The biggest mistake investors commonly make is looking for pricing rationality, and to expect a cause explanation for every effect. Market behavior is fundamentally not rational. Traders react not only to what they know, but what they think they know, what they can guess, and what they believe other people think and expect or have guessed. The stock is not being "punished" for anything but being traded publicly.

I agree with your message here in principle. There doesn't always need to be a reason for a stock price's movements. Sometimes the stock does very interesting things with very little to account for it, even after the fact. But sometimes you can draw a connection after the fact, and my assertion is that today was one of those times. The stock was indeed punished for being traded publicly, as you say, but the information that triggered it this time was fear of imminent margin collapse for Apple, Inc, or fear of other people's fear, or potential manipulation etc. Like you suggest, all kinds of nonlinear dynamics and chaos come into play, but sometimes the trigger is fairly visible even if the reaction is nonintuitive. Given that nothing fundamental changed between yesterday and today, this price drop represents a discount between one day and the next. Now that's only a relative measure, I understand, and it begs the question of whether it represents a "buying opportunity". Well, that's in the eye of the beholder, so here is a thought experiment for you...

(BTW, I am not talking about "day trading" here, as I believe that is nothing but a casino. Rather, I am talking as a long term investor.)

Suppose a potential investor computes a "valuation" of a stock for the purposes of determining whether he or she wants to invest for the long haul. (Note that whether the method of valuation used is a great one is not entirely relevant to my point.) Then a day like today comes along, and the only thing that changed relative to their valuation method (which, if they were well informed, already had the appropriate gross margins built in) is the current share price, which dipped by over 2% at one point today. The result is that the stock is that much cheaper relative to the individual's valuation, which amounts to a discount on that measure. Since different people use different methods and different assumptions for unknown input data, they have different valuations. And today's discount may have made the difference for deciding to go long. Subjectively, for those who believe AAPL is going up long term due to fundamentals of the company juxtaposed with the economy, the result is a "buying opportunity". (I'm one of those individuals, FWIW). For those who believe AAPL is going down long term, this is just the beginning of a "correction". Folks in the middle are simply still wondering what to make of it.

The bottom line is that I stand by my three earlier assertions, but whether that means a "buying opportunity" is subjective and dependent on so many other things, including stuff that has yet to happen.

Today was a day where the trade WAS motivated by the (not new) information. Note I only used the word motivated so as not to oversimplify the dynamics that you (correctly) point out played a role in the results.

Quote:

Originally Posted by Dr Millmoss

I don't see where you get the cynicism. It's certainly a far less cynical explanation than "it's all a manipulation," which we hear ten times a day on these boards whenever AAPL goes down for no apparent reason. It's also not simplistic; in fact, it's a short explanation of the complex human behavior of public trading. Traders are not only reacting to what they know, believe and think, but to what they believe others to know and think. In this particular case, even a trader who knows that the 10-K release contains nothing the markets didn't know a week ago, they might be tempted to trade on the expectations that other traders might not know. It's a kind of mass behavior that can't explained by rationality alone, if at all.

Note the distinction I make between trading and investing. Only traders care about this kind of short-term trading psychology. Investors don't pay any attention.

Exactly, Dr Millmoss. I am speaking from the standpoint of the investor. More often than not, when the stock does its weird daily gyrations with little to account for it, investors shouldn't pay any attention. However, note the potential here for an investor to pay attention sometimes: if a stock were to drop enough (pick an absurdly high amount of 30%, just to drive home the point) as the result of "news" that is already accounted for by that investor, then it may be wise to react and be a buyer. Of course, we didn't get close to a 30% drop, but make that a sliding scale. Some people may hop on a 2% drop.

Good comments, Thompson. Another thing to add into the mix is program trading by institutions. They make an awful lot of trading decisions based on nothing more than technical factors, and it's the institutions that move markets on any given day. They cause a lot of the otherwise unexplained volatility in the markets. You never know why they move into and out of stocks, if only because their methods are proprietary.

Anyhow, it's worth reminding ourselves of the celebration of sorts that occurred when AAPL first broke $300. That was only a couple of weeks ago. It's also worth considering AAPL's performance relative to the markets over the last year. And it's not like we're looking at some big selloff or something. I might be worried if I was seeing downgrades or lowered target prices, neither of which are happening.

Based entirely on an anonymous poster ranting on a message board. Nice evidence. You could cut the irony with a knife.

There was in fact a huge negative spike downwards in after hours trading just as the poster said.

Did it happen or didn't it? Do you know? No? At the very least I'd say that big drop is a pretty good candidate for having started giving this non-story legs in the first place. It certainly bears investigating to find out more.

There was in fact a huge negative spike downwards in after hours trading just as the poster said.

Did it happen or didn't it? Do you know? No? At the very least I'd say that big drop is a pretty good candidate for having started giving this non-story legs in the first place. It certainly bears investigating to find out more.

Three things. First, after-hours trading is thin and notoriously volatile. If you don't trade off the regular markets, then why do you even care? Second, every time AAPL moves down for reasons people don't understand, it seems like somebody automatically claims (literally) that a federal crime has been committed. For some reason, we never hear this accusation when it goes up. Third, using an anonymous poster as evidence of anything is about as desperate as it gets. If the same anonymous poster was claiming that every iPhone in the world was about recalled as defective, you'd be shouting BS and stock manipulation. Right?

Three things. First, after-hours trading is thin and notoriously volatile. If you don't trade off the regular markets, then why do you even care? Second, every time AAPL moves down for reasons people don't understand, it seems like somebody automatically claims (literally) that a federal crime has been committed. For some reason, we never hear this accusation when it goes up. Third, using an anonymous poster as evidence of anything is about as desperate as it gets. If the same anonymous poster was claiming that every iPhone in the world was about recalled as defective, you'd be shouting BS and stock manipulation. Right?

Regardless of the source (i.e. the ranting message board poster) I did learn something new from this link. Apparently a typo came across the wire last night, suggesting that Apple was guiding to 26% margins rather than 36%. Such a thing could easily be a trigger in the AH. (Not necessarily because everyone saw or believed it, but because it only takes a few people in AH to light a spark, inadvertently or otherwise, and get the ball rolling.)

We all know that the AH is fairly meaningless and can be easily influenced by such trivial things. But then, in the morning, when the media gets involved, they actually post things that sound as if Apple has issued a new warning. One story suggested this was the beginning of the end for Apple's "meteoric" climb. I guess they feel like they need to explain things as quickly as possible these days, else they'll be scooped by someone else. Then the herd mentality takes over, and entropy increases some more.

Having said all of that, and since I'm a long term investor, I agree with the "broader picture" you presented in a different post (above)... AAPL is on a terrific run over the past few months, and in the grand scheme of things, falling back to the low 300's is not that big of a deal considering it only spiked above 310 (and nearly 320) for about a day. And that's not much higher than we are now, on a percentage basis.

So I'm not worried about it. In fact, I feel quite good about things when FUD can be tossed and acted upon, but we still hover near all time highs.

... And I'd imagine there are a large number of casual investors in aapl that are easily spooked by # 1 above.

I was expecting, actually hoping for, a 10% decline on a knee-jerk reaction from those reading the words "Apple warns..." knowing most won't read anything else. Whatever movement the stock made today - what, a percent? - is completely meaningless.

Regardless of the source (i.e. the ranting message board poster) I did learn something new from this link. Apparently a typo came across the wire last night, suggesting that Apple was guiding to 26% margins rather than 36%. Such a thing could easily be a trigger in the AH. (Not necessarily because everyone saw or believed it, but because it only takes a few people in AH to light a spark, inadvertently or otherwise, and get the ball rolling.)

We all know that the AH is fairly meaningless and can be easily influenced by such trivial things. But then, in the morning, when the media gets involved, they actually post things that sound as if Apple has issued a new warning. One story suggested this was the beginning of the end for Apple's "meteoric" climb. I guess they feel like they need to explain things as quickly as possible these days, else they'll be scooped by someone else. Then the herd mentality takes over, and entropy increases some more.

Having said all of that, and since I'm a long term investor, I agree with the "broader picture" you presented in a different post (above)... AAPL is on a terrific run over the past few months, and in the grand scheme of things, falling back to the low 300's is not that big of a deal considering it only spiked above 310 (and nearly 320) for about a day. And that's not much higher than we are now, on a percentage basis.

So I'm not worried about it. In fact, I feel quite good about things when FUD can be tossed and acted upon, but we still hover near all time highs.

Thompson

All true. One of the problems is the media's need to explain everything, even when the explanations are so vague and post-hoc that they hardly explain anything. You won't find a financial report saying "Western Widget shares dropped 5% today for no reason anyone can figure out."

Apple's inventory increased ca $600,000,000 year to year. I suspect that they were building inventory, largely iPad, for the sales blitz now under way. This would be reflected in their cost of sales for the quarter, but not in the revenue. The inventory would probably be at cost of manufacture, which is about $300 for both the iPhone and the iPad, a=nd represent ca 2,000,000 units. This would drop the gross margin by about 3 percentage points, to be recovered when they are sold in the current quarter.

Inventory level of $1 billion isn't a lot at all when you consider that Apple's revenue is nearly $7 billion a month.

Inventory level of $1 billion isn't a lot at all when you consider that Apple's revenue is nearly $7 billion a month.

You are right, but Apple has traditionally sold most of their product direct so production could be closely matched to sales. The major exception has been the iPhone, but since demand has exceeded production there has been no need to build a finished goods inventory.

In preparation for the iPad blitz, Apple added about 5000 points of distribution: Target, Walmart, Verizon, AT&T, and so on. On site inventory must be built and on hand to fill the distribution channels on day 1. 200,000,000 units does not seem to be too much.

Three things. First, after-hours trading is thin and notoriously volatile. If you don't trade off the regular markets, then why do you even care?

I care because I own Apple stock, and when I see it get sandbagged for no good reason like it got sandbagged today, I want to know why. It's clear to even the dimmest bulb that the trouble started in after-hours trading, and lo and behold, there's a highly suspicious stock dump just two minutes before a "typo" hits the wire. The typo is fixed, of course, but the stock has been pulled down when it looked likely to go up.

Result: Apple is pulled all the way back down to 300 a share before it reverses.

Quote:

Second, every time AAPL moves down for reasons people don't understand, it seems like somebody automatically claims (literally) that a federal crime has been committed. For some reason, we never hear this accusation when it goes up.

Do you seriously believe that this kind of stock manipulation doesn't happen? Is your middle name Pollyanna by any chance?

Quote:

Third, using an anonymous poster as evidence of anything is about as desperate as it gets. If the same anonymous poster was claiming that every iPhone in the world was about recalled as defective, you'd be shouting BS and stock manipulation. Right?

Now, that's just dumb, using false analogies and personal attacks to try to bluster your way out of being on the wrong side of this issue. I credited you with more intelligence than that.

I care because I own Apple stock, and when I see it get sandbagged for no good reason like it got sandbagged today, I want to know why. It's clear to even the dimmest bulb that the trouble started in after-hours trading, and lo and behold, there's a highly suspicious stock dump just two minutes before a "typo" hits the wire. The typo is fixed, of course, but the stock has been pulled down when it looked likely to go up.

Result: Apple is pulled all the way back down to 300 a share before it reverses.

Do you seriously believe that this kind of stock manipulation doesn't happen? Is your middle name Pollyanna by any chance?

Now, that's just dumb, using false analogies and personal attacks to try to bluster your way out of being on the wrong side of this issue. I credited you with more intelligence than that.

I own AAPL too, and have had for over 13 years now. I've seen an awful lot of ups and downs over that time. I know enough to realize that what happens in after-hours trading makes little difference to me. I was simply pointing out that I have yet to hear any cries of stock manipulation when AAPL goes up for no apparent reason, only when it goes down. Are you saying this is wrong, or are you simply trying to avoid the point?

Calling dumb and Polyanna isn't the best way to protest what you incorrectly term a personal attack.

I own AAPL too, and have had for over 13 years now. I've seen an awful lot of ups and downs over that time. I know enough to realize that what happens in after-hours trading makes little difference to me. I was simply pointing out that I have yet to hear any cries of stock manipulation when AAPL goes up for no apparent reason, only when it goes down. Are you saying this is wrong, or are you simply trying to avoid the point?

I am saying that stock manipulation happens, and you know it.

Quote:

Calling dumb and Polyanna isn't the best way to protest what you incorrectly term a personal attack.

not very funny really. The guy that did it is clearly not being engaged enough at work. Nobody really did anything wrong, and I dont see the point of the exercise. It is interesting that the guy doesnt want respond to questions about this. Maybe someone should post up HIS private details and see what happens.
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